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First Thing We Do ... Let’s Kill All the Regulators!

Jonathan Foxx
Sep 30, 2016

“First thing we do, let’s kill all the regulators!”

Actually, Shakespeare's exact line is, ''The first thing we do, let's kill all the lawyers.''

This famous exhortation was stated by Dick the Butcher in Henry VI. Dick the Butcher was a follower of the rebel Jack Cade, who thought that if he disturbed law and order, he could become the king. So, carrying out the inference, Shakespeare was suggesting that if the rebels kill all the lawyers, law and order would be destroyed and he, Jack Cade, could become king. This incitement was not a denigration of lawyers, but a veiled homage to them!

In my recent article, "Wells Fargo, A Predator’s Tale," I wrote about how the lack of systemic accountability is at the core of illegal banking practices. Since the news broke of Wells Fargo’s financial debauchery, there has been no dearth of eschewing the encumbrance of blame.

The circular firing squad has begun! Let us count the ways.

►Damned if you do. Damned if you don’t.
•Politicians who want to dismantle the Consumer Financial Protection Bureau blame it for not going after Wells Fargo sooner.
•Proof of the pudding is in the eating.

►Politicians who want to strengthen the CFPB declare its virtues for having gone aggressively after a Too Big To Fail bank.
•Fix the problem. Not the blame. (Sort of!)

►Fire 5,300 low level employees—problem supposedly fixed—but management and compliance personnel remain largely unscathed and fully employed.
•The devil made me do it!

►Many of the fired 5,300 low level employees accuse management’s excessive sales demands for causing them to commit fraud in the service of performance goals.
•Rock the ramparts!

►Castigate the regulators for purportedly failing to find violations in examinations and then only belatedly pursuing enforcement.
•Quis custodiet ipsos custodies? - pace Juvenal (Who will guard the guards themselves?)

►Compliance department could not possibly have not known about the violations, but apparently nobody was overseeing the compliance department, at least not with compelling oversight.

This scam began as a result of a whistleblower. Then an investigation ensued, triggered by the whistleblower’s information. Shortly after the investigation began, the dark swindle leaked into the news – back in 2013! However, the fraud itself traces its sorry history to 2011.

Or to be precise, Wells Fargo began firing employees in 2011, The Los Angeles Times ran stories on the spurious practices in 2013, and the Los Angeles City Attorney filed his lawsuit against the bank in May 2015.

But why did the regulators not discover the violation? At this point, it appears that they missed it! Is that really possible? Maybe this was a resource issue. Somehow, I don’t think a resource issue caused the violation, if you consider that in 2015 Wells Fargo was the world's second largest bank by market capitalization and the third largest bank in the U.S. by assets. Let’s give them that for the moment! Let’s just assume it was a resource issue. Even so, that assumption would kind of lead to a big crack in the fault lines, a steep ravine in the culpability abyss, a chasmal canyon filled with unrequited expectations, a wobbly thread dangling from the drooping rafters of safety and soundness; for, practically speaking, it sure does seem that the examiners did not review the merely trifling routine details of opening new accounts.

In other words, there was a loophole! A cloistral loophole sheltered from the penetrating view of regulatory scrutiny. A money-making loophole that for years was exploited by Wells Fargo for all it was worth! And for years it remained buried in the muck of specious sales incentives, slithering its way undetected passed the fastidious watch of the examiners.

Those examiners! Spending so little time on trying to catch scams and so much time reviewing deposit accounts for issues like whether the correct interest rate is being paid or Bank Secrecy Act and anti-money laundering requirements are being followed. When they’re only chasing after interest rate compliance, it seems easy for an examiner to miss an operational loophole here or there. Having handled due diligence and audits for banks, I would note that checking on account creation is usually done by bank compliance staff as well as internal and external auditors. Since neither Wells Fargo nor its auditor, KPMG, will comment, it seems fair to piece together the probable scenario of Wells Fargo employees being fired for the fraudulent account opening practices as far back as 2011, with reporting of such practices by the auditor. So let’s venture to piece together a plausible scenario.

As to credit card accounts, generally auditors scrutinize loan delinquencies and credit quality; though regulators would also look at new accounts for the same activities, they will not usually spend all that much time on credit card accounts that have few or no transactions.

So here’s the nasty secret at the core of the loophole: examiners do not spend much time pouring over low balance, low activity accounts, because if the accounts are low balance, they are not a high credit risk, and if there is no activity, there is really no risk at all. That type of account is exactly the type of account needed for the scam’s success!

In my view, banking regulations have a long history of being biased toward credit risk over operational risk. Hence, regulators will concentrate their efforts on the former, sometimes at the expense of the latter.

And then there’s this from high up in the executive suite:

“We have made improvements to our sales practices, enhanced our training, and made significant investments in monitoring and controls to further ensure customers receive only the products they want.”

So opined recently John G. Stumpf, the chairman and chief Executive Officer of Wells Fargo. Clearly, resources are not an issue. Caught with one’s hands in the cookie jar, there seems to be plenty of money available to throw at fixing the problem internally. One way chosen to fix the problem was to allow Carrie Toldstedt, the head of the Community Banking unit, to retire in July with $125 million in bonuses, stock options, and restricted stock. At the time, this is what the CEO said:

“A trusted colleague and dear friend, Carrie Toldstedt has been one of our most valuable Wells Fargo leaders, a standard-bearer of our culture, a champion for our customers, and a role model for responsible, principled and inclusive leadership.”

Let's see if any and how much of this superb remuneration gets clawed back. Then again, if and when Mr. Stumpf retires, his golden parachute is currently worth a whopping $195 million in cash, stock and other compensation. So there's that!

Maybe the lack of early detection and remediation was not mostly the fault of regulators after all! If it’s not a resource issue for the financial institution, that must mean it is a resource issue for the prudential regulator charged with overseeing such a vast, complex, and international banking entity. Well, that changes things.

From May 2011 to July 2015, employees in Wells Fargo's retail banking division opened more than 1.5 million deposit accounts and around 565,000 credit card accounts without consumers' knowledge and consent. Grand total for the haul: $5 million! Cost of fines: $185 million. Refunds to consumers: $2.6 million, averaging $25 per refund.

So, to squeeze every last, solitary penny out of consumers, Wells Fargo opened deposit accounts and transferred funds without consumer authorization, applied for credit card accounts without consumer authorization, issued and activated debit cards without consumer authorization, and created phony email addresses to enroll consumers in online banking services.

That last misdeed is vexatious. Imagine consumers having an unauthorized account opened up by Wells Fargo employees, and having the email address assigned to them as [email protected] Yes. It happened. It happened blatantly and repeatedly!

This seems more a case of management malpractice than just a burdensome strain on regulatory resources. Is it possible to make such financial depravity go away by firing 5,300 employees, while the management itself remains virtually intact? How many of those who were fired also did not meet their performance goals? Is their a correlation? The notion that a scam of these proportions could be explained away by claiming sales incentives in the form of cross-selling caused the problem is a hollow gambit. These are sales practices which Wells Fargo only officially ended last week. Some people actually take the position that defrauding the consumer was not the goal; rather, the goal was to meet sales incentives, with the fraud being no more than collateral damage. From my vantage point, in this instance going to the goal is the goal. There is no special carve out in the law for shielding people who willfully defraud other people.

Then there’s this from high up in the Congressional chambers:

"We need to look no further than just last week to see why we need a strong Consumer Financial Protection Bureau, which used its authorities under Dodd-Frank to uncover a massive scheme under which millions of consumer accounts at Wells Fargo were fraudulently opened, with the bulk of this fraud perpetrated in my hometown of Los Angeles."

Thus opined Maxine Waters of California, a Democrat on the House Financial Services Committee, who was pointing out the obvious to her opposition, a group of politicians who are hell bent on re-legislating the Dodd-Frank Act to make significant changes to the CFPB’s structure and overall funding. Obviously, the timing of the opposition was less than pitch perfect, given that the work of the CFPB in this Wells Fargo matter actually did lead to consumer financial protection.

Naturally, banking industry associations are out and about decrying the regulators for failing to fix this mess sooner. To quote a tweet from the CEO of the Independent Community Bankers of America, “Where was the OCC? Where was the CFPB? The LA times laid this in their laps and it still went on for nearly 3 years!”

If it is disclosure that is being demanded, the better question would be why Wells Fargo failed to disclose this matter as a potential risk to investors in its Securities and Exchange Commission filings? That is certainly a breach of securities law! Or, to put a finer interrogatory to it, why criticize those who discovered and prosecuted the violation while softly assuaging the bank’s management that did not disclose it in its SEC filings? How about, “where was the management?”

I have also heard a sort of myopic “No Harm, No Foul” defense. It goes something like this: since customers did not know they had been signed up for the credit card accounts at issue, and since those cards were not used, Wells Fargo only needs to provide refunds and pay fines and we can all move on! Or, to crudely paraphrase Bishop Berkeley’s view back in 1710, "If a tree falls in a forest and no one is around to hear it, does it make a sound?"

We get this spin from a Wells Fargo spokesperson about how supportive the bank is of its employees, who said that the bank's "team members" were its "greatest assets,” averring:

“We strive to make every one of them feel valued, rewarded and recognized and we pride ourselves on creating a positive environment for our team members, including market competitive compensation, career-development opportunities, a broad array of benefits, and a strong offering of work-life programs.”

So "valued," it seems, that some Senators are asking the U.S. Department of Labor to investigate whether Wells Fargo violated federal laws by forcing employees to work unpaid overtime to meet the aggressive sales quotas that led to the creation of more than 2 million unauthorized accounts. 

So "rewarded and recognized," that the Senators are asking the Labor Secretary and the head of the Labor Department’s Wage and Hour Division to determine whether Wells Fargo violated the Fair Labor Standards Act by forcing employees to work those unpaid overtime hours or face termination for not hitting their new account sales goals. 

Such a "positive environment," that the Senators declared any investigation into Wells Fargo's potential FLSA violations "should include a comprehensive inquiry into whether Wells Fargo aggressively skirted overtime laws - failing to pay overtime to bank tellers and associates who stayed late or came in on weekends to meet their sales quotas, or misclassifying salaried bank associates as overtime-exempt to avoid paying the overtime guaranteed to them by the FLSA.” 

Clearly, the team members have been "valued," "rewarded and recognized," thriving in a "positive environment." Very supportive, indeed!

In fact, the team members are so appreciative of the support they received from Wells Fargo that they have slapped a $2.6 billion putative class action in Los Angeles County Superior Court on behalf of the bank’s California workers, claiming that they were fired or demoted for refusing to participate in the scam. The lawsuit alleges wrongful termination and retaliation, a violation of California labor laws, along with failure to pay overtime and other wages, among other causes of action.

It is claimed that the affected employees were retaliated against when they did not meet the unrealistic sales quotas and refused to go along with the scam.

Here's their view:

“The good employees with a conscience who tried to meet the sales quotas without engaging in fraudulent scams are the biggest victims. ... They are the employees that this lawsuit seeks to redress.”

In other words, Wells Fargo allegedly fired the employees who could not ethically keep up with the unrealistic quotas in order to keep pressure on the workers willing to unlawfully open up fake accounts in customers’ names. This further resulted in the employees frequently working off the clock in an effort to meet the demanding sales goals.

The scheme, the plaintiffs say, was orchestrated by none other than CEO John Stumpf himself, and the bank knew their unreasonable quotas were “driving these unethical behaviors” in order to increase Wells Fargo’s stock price. 

The lawsuit lays out their position thus: 

“Wells Fargo’s fraudulent scam, which was set at the top and directed toward the bottom, was to squeeze employees to the breaking point so they would cheat customers so that the CEO could drive up the value of Wells Fargo stock and put hundreds of millions of dollars in his own pocket.” ... “Wells Fargo could then place the blame on thousands of $12-an-hour employees.”

Oh the outrage! Witness Republican Richard Shelby’s statement about fostering “a corporate culture that drove company ‘team members’ to fraudulently open millions of accounts using their customers’ funds and personal information without their permission.” But this oration of high dudgeon is surely speaking with a forked tongue, which is an anatomical feature of reptiles, where a reptilian tongue splits into two distinct lines at the tip: one tip smells and the other tip senses the direction from which the smell is coming. Given the art of political tropotaxis, where the forked tongue flaps, wags, snaps and darts all the time, it is no wonder that Mr. Shelby is firmly committed to eliminating the CFPB – the agency that pursued the violation in the first place and brought Wells Fargo to the golden gates of settlement. Most of us non-politicians would have a problem with such cognitive dissonance.

Somehow, whatever the twists and turns by “team members,” regulators, politicians, examiners, stakeholders, prosecutors, compliance officers, U.S. attorneys, and all manner of disputants, the path always leads back to management and its governance of the bank’s operational risks. Whistleblowers, tips to reporters, and investigations by the OCC, the CFPB, and municipal governments – this chain of participants who discovered the scam and the agencies that prosecuted the perpetrator – they are not the scammer! Tracking the route of the justifications, rationalizations, pretexts, evasions, admissions, pleas, regrets, and extenuations, inevitably leads to the starting point: management malfeasance.

Put succinctly, malfeasance is the performance by an official of an act that is legally unjustified, harmful, or contrary to law – an act of wrongdoing that is especially associated with a breach of public trust. 

Sometimes the malfeasor is a band of hoodlums bearing the simulacrum of perfectly respectable bankers and counting house tycoons.

Jonathan Foxx is president and managing director of Lenders Compliance Group, Brokers Compliance Group, Servicers Compliance Group and Vendors Compliance Group, national companies devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted by phone at (516) 442-3456, by e-mail at [email protected] or visit


Sep 30, 2016